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Prior to the launch of a client's Hedge Fund Website, we wrote a series of e-newletters that covered fund basics, compared the fee structure to those of Mutual Funds, and because a portion of the Hedge Fund profits would go to environmental causes, we covered the trend in ethical investing.
Anatomy of a Hedge Fund
by sharon rockey
To recap our first newsletter, there has been an explosion of growth in Hedge Funds--there are now nearly 6000 worldwide and in 2001 alone, they raised $563 billion. Since Hedge Funds are loosely regulated, their flexibility to diversify far exceeds that of mutual funds.
In this edition you will learn how Hedge Funds originated and what forces are driving the trend.
In The Beginning. . .
It all started in 1949 when Alfred Winslow Jones tried to eliminate some of the risks associated with holding long stock positions(1) and ended up creating something so revolutionary, it outperformed all mutual funds of its time, (as was reported in Fortune Magazine in 1966). Jones had combined a leveraged long stock position(2) with a portfolio of short stocks (3) creating a fund with an incentive fee structure and built the investment world's first Hedge Fund.
On a Fast Growth Track
The $563 billion that poured into Hedge Funds in 2001 countered the high levels of volatility in the worldwide equity markets over the past year.
Will this trend continue?
Indications are that the trend in Hedge Fund investing and dollars invested will continue to increase. In November 2001, CALPERS, one of the country's largest pension funds, announced plans to invest $1 billion with Hedge Fund mangers over the next 18 months to help boost its returns. Institutional and individual investors alike recognize that fewer regulatory constraints allow Hedge Fund managers the freedom to be more creative and quicker to respond to market changes than those managing traditional, highly regulated funds.
Inefficient Markets Create Opportunities
The "efficient market hypothesis" says that at any given time, asset prices fully reflect all available information. But as global markets expand and become increasingly complex, inefficiencies emerge and create profit opportunities for those that have the expertise and flexibility to react quickly.
Sophistocated Hedge Fund managers have the expertise and an edge. Using information technology to make intelligent and informed estimates of the real value of assets, they take positions in those assets where market value differs from their estimates, hedge out needless risk, and reap the return for their investors before information about the asset becomes more widely available and the market reacts accordingly.
But Do Hedge Funds Hedge?
The term "hedge fund" does not necessary refer to hedging(4) investments, but has become universally accepted as a way to describe a diverse range of underlying investment strategies--the Hedge Fund structure. Watch for our future editions to learn more about these strategies.
(1 Long stock position: You own the stock and your returns are relative to the market indices.)
( 2 Leverage: utilizing borrowed funds to purchase stocks in hopes that the investment rate of return exceeds the cost of borrowed funds.)
(3 Short: borrowing a stock on collateral and immediately selling it on the market with the intention of buying it back later at a lower price.)
(4 Hedging: taking positions to offset changes in the market such as purchasing a long position and a short position in similar stocks to offset the effect any negative change in the market may have on the long position.)
Next--> When Hedge Fund Managers Become Business Partners
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